KOPIN CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
Forward-looking statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are subject to the safe harbor created by such sections. Words such as "expects," "anticipates," "intends," "plans," "believes," "could," "would," "seeks," "estimates," and variations of such words and similar expressions, and the negatives thereof, are intended to identify such forward-looking statements. We caution readers not to place undue reliance on any such "forward-looking statements," which speak only as of the date made, and advise readers that these forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties, estimates, and assumptions by us that are difficult to predict. Various factors, some of which are beyond our control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. All such forward-looking statements, whether written or oral, and whether made by us or on our behalf, are expressly qualified by these cautionary statements and any other cautionary statements which may accompany the forward-looking statements. In addition, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of this report, except as may otherwise be required by the federal securities laws. We have identified the following important factors that could cause actual results to differ materially from those discussed in our forward-looking statements. Such factors may be in addition to the risks described in Part I, Item 1A, "Risk Factors;" Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations; and other parts of our Annual Report on Form 10-K for the fiscal year endedDecember 25, 2021 . These factors include: the extent of the impact of the coronavirus ("COVID-19") pandemic and government responses thereto on our business and operations, and the economic and societal disruptions resulting from the COVID-19 pandemic; our ability to source semiconductor components and other raw materials used in the manufacturing of our products amidst continued intermittent shortages, including from new and alternative suppliers; our ability to prosecute and defend our proprietary technology aggressively or successfully; our ability to retain personnel with experience and expertise relevant to our business; our ability to invest in research and development to achieve profitability even during periods when we are not profitable; our ability to continue to introduce new products in our target markets; our ability to generate revenue growth and positive cash flow, and reach profitability; the strengthening of theU.S. dollar and its effects on the price of our products in foreign markets; the impact of new regulations and customer demands relating to conflict minerals; our ability to obtain a competitive advantage in the wearable technologies market through our extensive portfolio of patents, trade secrets and non-patented know-how; our ability to grow within our targeted markets; the importance of small form factor displays in the development of defense, consumer, and industrial products such as thermal weapon sights, safety equipment, virtual and augmented reality gaming, training and simulation products and metrology tools; the suitability of our properties for our needs for the foreseeable future; our expectation not to pay cash dividends for the foreseeable future and to retain earnings for the development of our businesses; our need to achieve and maintain positive cash flow and profitability, and our expectation that if we do not achieve and maintain positive cash flow and profitability, our financial condition will ultimately be materially adversely affected, and we will be required to reduce expenses, including our investments in research and development or raise additional capital and our ability to support our operations and capital needs for at least the next twelve months through our available cash resources. Overview We are a leading developer, manufacturer and seller of miniature displays and optical lenses (our "components") for sale as individual displays, components, modules, or higher-level subassemblies. We also license our intellectual property through technology license agreements. Our component products are used in highly demanding high-resolution portable military, enterprise and consumer electronic applications, training and simulation equipment and 3D metrology equipment. Our products enable our customers to develop and market an improved generation of products for these target applications. 18
The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended
Results of Operations Our interim period results of operations and period-to-period comparisons of such results may not be indicative of our future operating results. Additionally, we use a fiscal calendar which may result in differences in the number of workdays in the current and comparable prior interim periods and could affect period-to-period comparisons. The following discussions of comparative results among periods, including the discussion of results by display application, should be viewed in this context. Revenues. For the three and nine months endedSeptember 24, 2022 andSeptember 25, 2021 , our revenues by display application, which include product sales and amounts earned from research and development contracts ("R&D"), were as follows: Three months ended Three months ended Nine months ended Nine months ended September 24, September 25, September 24, September 25, (In thousands) 2022 2021 2022 2021 Defense $ 5,851 $ 3,483 $ 17,695 $ 12,257 Industrial 1,727 2,724 4,889 7,394 Consumer 676 384 1,182 1,318 R&D 3,375 4,099 11,089 10,364 Other 100 197 362 1,136 Total Revenues $ 11,729 $ 10,887 $ 35,217 $ 32,469
Sales of our products for Defense applications include systems used by the military both in the field and for training and simulation. The increase in Defense applications revenues for the three and nine months endedSeptember 24, 2022 as compared to the three and nine months endedSeptember 25, 2021 is primarily from an increase in volume shipments for our thermal weapon sight systems for soldiers. We continue to experience intermittent shortages of raw materials, which affected our ability to ship units in the nine month period endedSeptember 24, 2022 and may affect our ability to manufacture and ship products in the fourth quarter of 2022 and beyond. 19 Industrial applications revenue represents customers who purchase our display products for use in 3D metrology equipment and headsets used for applications in manufacturing, distribution, and public safety. Our 3D metrology customers are primarily located inAsia and sell to Asian contract manufacturers who use the 3D metrology machines for quality control purposes. The decrease in Industrial applications revenues for the three and nine months endedSeptember 24, 2022 as compared to the three and nine months endedSeptember 25, 2021 was primarily due to a decrease in sales of products used within wearable headsets used for applications in manufacturing and distribution and a decrease in sales of display products for 3D automated optical inspection ("AOI") metrology equipment. Shortages of certain components affected our ability to manufacture and ship products in 2022 for the AOI market. Our displays for Consumer applications are used primarily in thermal imaging products, recreational rifle and hand-held scopes and augmented reality (AR) and virtual reality (VR) headsets. The increases in Consumer applications revenues for the three months endedSeptember 24, 2022 as compared to the three months endedSeptember 25, 2021 were primarily due to an increased demand for our organic light emitting diode ("OLED") products. The decreases in Consumer applications revenues for the nine months endedSeptember 24, 2022 as compared to the nine months endedSeptember 25, 2021 were primarily due to a decreased demand for our OLED products. Our OLED products are new and therefore orders are sporadic as customers are qualifying and developing products using our OLED products. R&D revenues decreased in the three months endedSeptember 24, 2022 as compared to the three months endedSeptember 25, 2021 , primarily due to existing customer funded R&D programs moving into production. R&D revenues increased in the nine months endedSeptember 24, 2022 as compared to the nine months endedSeptember 25, 2021 , primarily due to an increase in funding forU.S. defense programs and development of OLED displays. International revenues represented 20% and 18% of total revenues for the three and nine months endedSeptember 24, 2022 , respectively, and 30% and 31% of total revenues for the three and nine months endedSeptember 25, 2021 , respectively. We categorize our revenues as either domestic or international based upon the delivery destination of our product. For example, if the customer is located inAsia or if aU.S. customer has its Asian contract manufacturer order product from us and we deliver the product toAsia , we categorize both these sales as international. In addition, if we earn royalties on sales from a customer, the royalties are categorized as domestic or international based on how the product revenues are categorized.
The decline in international revenue was the result of lower product sales for 3D AOI metrology equipment and industrial wearable headset applications.
Our international sales are primarily denominated inU.S. currency. Consequently, a strengthening of theU.S. dollar could increase the price in local currencies of our products in foreign markets and make our products relatively more expensive than competitors' products that are denominated in local currencies, which could lead to a reduction in sales or profitability in those foreign markets. We have not taken any protective measures against exchange rate fluctuations, such as purchasing hedging instruments with respect to such fluctuations, because of the historically stable exchange rate between the British Pound Sterling (the functional currency of ourU.K. subsidiary) and theU.S. dollar. Foreign currency translation impact on our results, if material, is described in further detail under "Item 3. Quantitative and Qualitative Disclosures About Market Risk" section below. Cost of Product Revenues. Cost of product revenues, which is comprised of materials, labor and manufacturing overhead related to the production of our products for the three and nine months endedSeptember 24, 2022 andSeptember 25, 2021 , were as follows: Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended (In thousands, except September 24, September 25, September 24, September 25, for percentages) 2022 2021 2022 2021 Cost of product revenues $ 7,987 $ 5,145 $ 23,676 $ 17,586 Cost of product revenues as a % of net product revenues 97 % 78 % 100 % 83 % The increase in cost of product revenues as a percentage of net product revenues for the three months endedSeptember 24, 2022 , as compared to the three months endedSeptember 25, 2021 , was primarily due to an additional$1.0 million warranty charge resulting from defective material received from a supplier and manufacturing inefficiencies caused by supply chain disruptions. The increase in cost of product revenues as a percentage of net product revenues for the nine months endedSeptember 24, 2022 , as compared to the nine months endedSeptember 25, 2021 , was primarily due to lower manufacturing efficiencies driven by disruptions to the manufacturing process caused by intermittent raw material shortages, higher prices for raw materials, and the$1.0 million warranty charge. During 2021, we became aware of global shortages of semiconductor components and production capacity affecting many industries. In the first nine months of 2022, we were impacted by a shortage of several semiconductor components from our regular vendors that are necessary to manufacture our products. We are also seeing prices increase for semiconductor components and other raw materials. We are evaluating other possible sources for the components we use and are in the process of redesigning certain of our products to incorporate alternative semiconductor components. If we are unable to find replacement components, we expect that our production will be disrupted. The shortage of semiconductor components is a very dynamic situation, and we rely on our vendors to provide information about the vendors that they use. 20
Research and Development. R&D expenses are incurred in support of internal display development programs and programs funded by agencies or prime contractors of theU.S. government and commercial partners. R&D costs include staffing, purchases of materials and laboratory supplies, circuit design costs, fabrication, and packaging of display products, and overhead. In fiscal year 2022, we expect our R&D expenditures to be related to our display products, overlay weapon sights and OLED display technologies. Funded and internal R&D expenses are combined in research and development expenses in the condensed consolidated statements of operations. R&D expenses for the three and nine months endedSeptember 24, 2022 andSeptember 25, 2021 were as follows: Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended September 24, September 25, September 24, September 25, (In thousands) 2022 2021 2022 2021 Funded $ 1,843 $ 1,996 $ 8,391 $ 6,622 Internal 1,598 1,756 5,604 4,433 Total research and development expense $ 3,441 $ 3,752 $ 13,995 $ 11,055
Funded R&D expense for the three months endedSeptember 24, 2022 decreased as compared to the three months endedSeptember 25, 2021 primarily due toU.S. defense programs transitioning to production. Funded R&D expense for the nine months endedSeptember 24, 2022 increased as compared to the nine months endedSeptember 25, 2021 primarily due to increased spending onU.S. defense programs. Internal R&D expenses for the three months endedSeptember 24, 2022 decreased compared to the three months endedSeptember 25, 2021 primarily due to decrease in OLED development costs. Internal R&D expenses for the nine months endedSeptember 24, 2022 increased compared to the nine months endedSeptember 25, 2021 primarily due to an increase in OLED development costs and the redesign of certain products to incorporate different semiconductor components as a result of shortages of the legacy semiconductor components. Selling, General and Administrative. Selling, general and administrative ("S,G&A") expenses consist of the expenses incurred by our sales and marketing personnel and related expenses, and administrative and general corporate expenses. S,G&A expenses for the three and nine months endedSeptember 24, 2022 andSeptember 25, 2021 were as follows: Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended (In thousands, except September 24, September 25, September 24, September 25, for percentages) 2022 2021 2022 2021 Selling, general and administration expense $ 4,320 $ 4,036 $ 13,112 $ 13,983 Selling, general and administration expense as a % of revenues 37 % 37 % 37 % 43 % S,G&A expense increased for the three months endedSeptember 24, 2022 as compared to the three months endedSeptember 25, 2021 primarily due to an increase in compensation and professional fees, which were partially offset by lower stock-based compensation. S,G&A expense decreased for the nine months endedSeptember 24, 2022 as compared to the nine months endedSeptember 25, 2021 primarily due to a decrease in stock-based compensation and professional fees partially offset by increases in compensation costs, information technology expenses and travel expenses. Other (Expense) Income, net. Other (expense) income, net, is primarily composed of interest income, foreign currency transaction and remeasurement gains and losses incurred by ourU.K. -based subsidiary and fair value adjustments for equity investments. Other (expense) income, net, for the three and nine months endedSeptember 24, 2022 andSeptember 25, 2021 was as follows: Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended September 24, September 25, September 24, September 25, (In thousands) 2022 2021 2022 2021
Other (expense) income, net $ (2,094 ) $ (51
) $ 2,506 $ 89 In the three months endedSeptember 24, 2022 , we recorded a$2.0 million impairment charge on an equity investment. Other income for the first quarter of 2022 includes a gain of$4.7 million resulting from the mark to market of an equity investment. During the three and nine months endedSeptember 24, 2022 , we recorded foreign currency losses of$0.1 million and$0.2 million , respectively, as compared to foreign currency losses of less than$0.1 million and gains of$0.1 million , respectively for the three and nine months endedSeptember 25, 2021 .
Tax provision. We recorded a provision for income taxes of less than
Net Loss Attributable to Noncontrolling Interest. As ofSeptember 24, 2022 , we owned 80% of the equity of eMDT America ("eMDT"). Net loss attributable to noncontrolling interest on our condensed consolidated statements of operations represents the portion of the results of operations of eMDT which is allocated to the stockholders of the equity interests not owned by us. The change in net loss attributable to noncontrolling interest is the result of the change in the results of operations of eMDT for the three and nine months endedSeptember 24, 2022 andSeptember 25, 2021 . 21 Net Loss Attributable toKopin Corporation . We incurred net losses attributable toKopin Corporation of$6.1 million and$13.2 million during the three and nine months endedSeptember 24, 2022 , respectively, compared to net losses attributable toKopin Corporation of$2.1 million and$10.1 million during the three and nine months endedSeptember 25, 2021 , respectively. The increase in the net loss attributable toKopin Corporation during the three and nine months endedSeptember 24, 2022 compared to the three and nine months endedSeptember 25, 2021 was partially due to a$1.0 million warranty charge due to a supply chain related quality issue from a vendor, lower gross margins, and a$2.0 million impairment charge on an equity investment.
Cash and capital resources
AtSeptember 24, 2022 andDecember 25, 2021 , we had cash and cash equivalents and marketable debt securities of$15.0 million and$29.3 million , respectively, and working capital of$21.4 million and$34.7 million , respectively. The change in cash and cash equivalents and marketable debt securities was primarily due to net outflow of cash used in operating activities of$15.6 million and capital expenditures of$0.6 million , partially offset by the sale of 2.3 million shares of common stock for net proceeds of$2.8 million . We have incurred net losses of$13.2 million and$13.4 million for the nine-month period endedSeptember 24, 2022 and for the fiscal year endedDecember 25, 2021 , respectively, and net cash outflows from operations of$15.6 million and$10.7 million for the nine-month period endedSeptember 24, 2022 and for the fiscal year endedDecember 25, 2021 , respectively. These factors initially raise substantial doubt about our ability to continue as a going concern. Management's plans to alleviate the conditions that raise substantial doubt include operational improvements being implemented and the curtailment of certain development programs, both of which are expected to preserve cash. During the nine months endedSeptember 24, 2022 , we sold 2.2 million shares of common stock and 0.1 million shares of treasury stock for gross proceeds of$2.9 million (average of$1.26 per share) before deducting broker expenses paid by us of less than$0.1 million , pursuant to our At-The-Market Equity Offering Sales Agreement, dated as ofMarch 5, 2021 (the "ATM Agreement") withStifel, Nicolaus & Company, Incorporated ("Stifel"), as agent, under which we may sell up to$50.0 million of our common stock. We have approximately$41.4 million worth of common stock remaining available for sale under the ATM Agreement. During the nine months endedSeptember 25, 2021 , wey sold 3.1 million shares of common stock for gross proceeds of$21.7 million (average of$7.00 per share), before deducting broker expenses paid by us of$0.7 million , pursuant to our ATM agreement with Stifel as agent, under which we can sell up to$50.0 million of our common stock and an At-The-Market Equity Offering Sales Agreement dated as ofFebruary 8, 2019 (the "Previous ATM Agreement") also with Stifel, as agent. The Previous ATM Agreement has since terminated pursuant to its terms as a result of the sale of all the shares subject to such agreement.
Cash and cash equivalents and negotiable debt securities held in
September 24, 2022 December 25, 2021
Domestic locations $ 14,127,354 $ 27,031,695
International locations 81,148 865,416
Subtotal cash and cash equivalents
marketable debt securities held in U.S.
dollars 14,208,502
27,897,111
Cash and cash equivalents held in other currencies and converted toU.S. dollars 794,507
1,398,355
Total cash and cash equivalents and marketable debt securities $ 15,003,009$ 29,295,466 22 We have no plans to repatriate the cash and cash equivalents held in our foreign subsidiary,Forth Dimension Displays, Ltd. and, as such, we have not recorded any deferred tax liability with respect to such cash.
We expect to spend between
InOctober 2022 , we entered into an agreement to invest$2.0 million in an Asian company pending the completion of a development agreement and other actions between Kopin and the Asian company. The investment is expected to take place in the fourth quarter of 2022.
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